Crypto Startup: Why VCs Are Rushing Back to Crypto Startups
FTX seems like a case of massive fraud, along the lines of Enron. There is growing evidence that founders took the money out of the business and there was no board to oversee management. The big VCs who invested in FTX without any due diligence failed their investors.
So, while things are not looking rosy for the crypto industry, most VCs remain positive about the future of crypto. JP Morgan, one of the world’s leading financial institutions, recently unveiled its plans to launch a cryptocurrency wallet for digital currency transfer and exchange. The hypothesis is simple: even though FTX crashed, blockchain – the technology that powers cryptocurrency – remains robust. No one questions the future of blockchain.
Cryptocurrencies are just one application of blockchain. Blockchain forms a large part of a more widely used term called Web 3.0. Most experts predict that the internet will evolve into a more decentralized structure that we call Web 3.0. Metaverse is another cog for Web 3.0. Many experts believe it is the future of the web. Smart contracts based on blockchain will play a major role in the future.
This FTX fallout was the result of an unfortunate chain of events caused by a large venture capital backed company with questionable transactions and questionable ethics. It was an oversight on the part of the investors. While this has certainly hurt cryptocurrency sentiment, VCs remain bullish on the future of this asset class. Venture capital is patient capital, and VCs play the long game. They fund innovation and understand the risks that come with it. They know that the odds of cryptocurrencies playing a major role in the future of commerce are high and support such startups.
Web 3.0 startups leverage futuristic technologies with cutting-edge innovations to improve today’s business models. From investing in a piece of property for as little as Rs 100 to having virtual dates with your long-distance partner in the metaverse, everything is possible in Web 3.0. They know that several companies will fail before Web 3.0 becomes a reality.
Venture capital is a risky business with fat tails and asymmetric gains. It’s a classic case of winner-take-all. VCs are always chasing the 100x opportunities that come with big risks. Therefore, they continue to support crypto startups because they know that future payouts outweigh the risk.
Many people, including some LPs, question the massive failure of VCs to invest millions in companies like FTX. Sequoia Capital, the gold standard of Venture Capital and one of the biggest backers of FTX, apologized to the fund’s investors for their lack of due diligence before investing. But unlike traditional investment firms, VCs have a long-term horizon. They and most of their LPs are fine with short-term effects as long as the fundamentals don’t change.
VCs are betting on a change in user behavior and see Web 3.0 as the future. If someone would have asked 15 years ago, that we should order groceries online through a mobile app without having the company’s contact number, no one would have believed it. But this is the reality today.
Web 3.0 startups need better mentors and processes that understand the challenges and complexities of Web 3.0. Legacy governance mechanisms such as annual audits cannot keep up with an ever-changing ledger. Therefore, we expect more money to come in to support players such as Web 3.0-focused accelerators and incubators and back-end technology applications that help these companies grow sustainably with increased transparency. The nature of venture-backed startups may change in the future, but the technology is here to stay, and wise investors will continue to invest in it. With lower valuations due to the current headwinds, most are finding great businesses at attractive prices.
(Author is Pushkar Singh, Partner at Tremis Capital)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
